Former IMF Chief Economist Simon Johnson should be familiar to readers of the fine
Baseline Scenario blog which he writes together with James Kwak. While visiting the
Bloomberg website, I came across a rather intriguing
op-ed in which he discusses the Ireland crisis. Aside from the usual European political-economic gyrations to consider, he makes a seemingly off-the-wall suggestion that had me thinking: Given that they are the world's new moneybags compared to the hard-pressed Europeans and subprime-addled Americans, he believes the Chinese are well-placed bail out troubled Eurozone economies. What's more, he says doing so should buy the PRC some breathing room from constant EU and US complaints over unfair trade practices:
In fact, the Irish leadership has every incentive to delay until other countries can be dragged into turmoil. The crisis will become euro-zone wide, at which point all eyes will turn to some combination of the European Central Bank, the German taxpayer, and the IMF. But the ECB can’t pay and the German taxpayer won’t pay. Does the IMF have the resources to tackle Spain, let alone a bigger country like, say Italy or even France? The U.S. could add sufficient funding to the mix -- this is what it means to be a reserve currency -- but the mood in Washington has shifted against bailouts.
As an alternative, Europe could place a call to Beijing to find out if China would like to commit some of its $2.6 trillion in reserves to keep European creditors whole. This would be an enormous opportunity for China to vault to a leading global role. Perhaps it was a good idea to place Min Zhu, a top Bank of China official, in a senior position at the IMF.
If China offered to recapitalize the IMF, become the largest shareholder, and move the organization to Beijing (according to the Articles of Agreement, the IMF’s headquarters should be in the capital of the largest shareholder), wouldn’t that make for an interesting chess game?
Whoa, now you're talking. Simon Johnson is of course correct in pointing out that the IMF Articles of Agreement stipulate that the institution should be headquartered in the country of its largest funder. Remembering that the US was the world's largest creditor back in the day--the postwar period, to be exact--it certainly wouldn't have occurred to those present at Bretton Woods that Generalissimo Chiang Kai-Shek's pipsqueak communist rivals would soon become the world's largest creditors a couple of decades down the line. (Or even China's leaders, of course.) Here is the relevant IMF
text:
Article XIII - Offices and Depositories
Section 1. Location of offices
The principal office of the Fund shall be located in the territory of the member having the largest quota, and agencies or branch offices may be established in the territories of other members.
Thinking about it more, doesn't it sound far-fetched to us that Beijing will become the host of IMF headquarters as China becoming the world's largest creditor did in 1944 to those at Bretton Woods? Times are a-changing, so I'm not one to rule out this happening in my lifetime. That said, there are formidable obstacles to this happening:
- Won't the Chinese swapping foreign exchange holdings for SDRs detract from "managing" foreign exchange levels?
- Wouldn't the Chinese be wary of bequeathing the opprobrium heaped on the US for being the hosts for this often-unpalatable lender-of-last-resort?
- Similarly, wouldn't China be wary of losing its self-proclaimed status as a champion of Third World causes and become the very embodiment of "economic imperialism"?
- If China's interest is in showing magnanimity towards fallen minor Eurozone countries (as it has already indicated before), why bother with the American-dominated IMF and just lend unilaterally?
- Despite being flat broke and rather pathetic , would the US readily countenance losing the IMF so easily as another signifier of American decline?
- Perhaps conveniently for certain countries, participation in IMF facilities like the General Agreements to Borrow (GAB) and New Agreements to Borrow (NAB) do not necessarily boost voting shares for emerging large contributors.
The geopolitics are certainly interesting: Will a weary nation relinquish one of the remaining levers it holds on the world economy so readily? Is the new contender willing and able to take up this mantle of leadership? All I can say is that the world economy certainly looks different from where I'm sitting 64 years after the halcyon days of John Maynard Keynes and Harry Dexter White. Bring on Beijing, baby!
Former IMF Chief Economist Simon Johnson should be familiar to readers of the fine Baseline Scenario blog which he writes together with James Kwak. While visiting the Bloomberg website, I came across a rather intriguing op-ed in which he discusses the Ireland crisis. Aside from the usual European political-economic gyrations to consider, he makes a seemingly off-the-wall suggestion that had me thinking: Given that they are the world's new moneybags compared to the hard-pressed Europeans and subprime-addled Americans, he believes the Chinese are well-placed bail out troubled Eurozone economies. What's more, he says doing so should buy the PRC some breathing room from constant EU and US complaints over unfair trade practices: